History 101

Money that is not Scarce is a Poor Temporary Storage of Wealth

They say money doesn’t grow on trees. And it’s a good thing it doesn’t. For money is a temporary storage of wealth. It temporarily stores value. And one if its attributes is that it has to be scarce. For example, let’s say you are a highly skilled tomato grower. And you work in your garden 12 hours each day weeding, fertilizing, watering, tying, pruning, etc., your many fields of tomato plants. Producing beautiful tomatoes that everyone just loves. You love your tomatoes so much that you actually gave up your day job to grow them full time. And support your family with the proceeds from selling your tomatoes. Which you will exchange with others for money. Provided that money is scarce. And will hold the value of your tomatoes. Until you can exchange that money for something you want.

Now let’s assume money grows on trees. Anyone can plant one in their backyard. And it grows like a weed. That is, you don’t have to fertilize it or water it or do anything else for it. And anytime you want something you just walk to your money tree and pick the bills you need. We would never have to work again if we all had money trees in our backyard. Wouldn’t that be great? Or would it? What would happen if everyone quit working because they, too, had a money tree in their backyard? If no one worked then there would be nothing to buy with the money from your money tree.

But there is another problem. If everyone had a money tree there would be such much money in circulation that it would no longer be scarce. And if it’s not scarce it isn’t money. It isn’t a temporary storage of wealth. It won’t temporarily store value. Because someone that has something of value, say delicious tomatoes, won’t want to trade them for something that he or she can just pick off of his own money tree. Instead, he or she would rather trade those tomatoes for something that does have value. Like, say, mozzarella cheese. So a skilled cheese-maker and the skilled tomato-grower can meet to trade things of value with each other. Tomatoes and mozzarella cheese. And then each can make a delicious Caprese salad. Which also has value. Unlike money that grows on trees that anybody can pick whenever they want to. Filling the world with people with lots of money but nothing to buy. Because no one works to grow or make anything.

When Spain brought back New World Gold and Silver it unleashed Inflation in the Old World

For anything to be money it must be scarce. Just think of the laws of supply and demand. If there are droughts all summer long farmers have smaller harvests. Which raises the price of what they bring to market. Because demand is greater than the supply. If there was a great growing season they have bumper crops. Which lowers the price of what they bring to market. Because supply is greater than demand. So the scarcer something is the more valuable it is. And so it is with money.

The main Roman coin was the silver denarius. As the Roman Empire reached its zenith her borders stopped moving out. The Roman legions stopped conquering new lands. And without new conquest there were no spoils to send back to Rome. So the Romans had to raise taxes to pay for the cost of empire. The administration of it. The protection of it. And a growing welfare state to keep the people content. To help with these great expenditures they began to debase the denarius. Mixing more and more lead into the coin. Reducing the silver content. So they could make more coins with the available silver. Thus making these coins less scarce. And less valuable. Unleashing an inflation so bad that it devalued the denarius so much that no amount of them could buy anything. Eventually even the Roman government would refuse to accept it in payment of taxes. Demanding gold instead. Or payment in kind.

When Spain arrived in the New World they found a lot of gold and silver. Which Europeans used as money in the Old World. The Spanish brought so much gold and silver back to the Old World that it greatly expanded the money supply. Making gold and silver less scarce. And less valuable. Requiring more of it to buy the things it once bought. So prices rose. Because of the inflation of the money supply.

The War Reparations the Versailles Treaty imposed on Germany led to their Hyperinflation

During the American Revolution there was little specie (i.e., gold and silver coin) in the colonies. As wars are expensive this made it difficult to finance the war. The Continental Congress asked for contributions from the states. And could only hope the states would give them some money. For they had no taxing powers. But they never were able to raise enough money. So they borrowed what they could. And then started printing paper money. The continental. But they printed so many of them that they were far from scarce. The massive inflation devalued the continental so much that it created the expression “not worth a continental.” Which meant something was absolutely worthless. The people would refuse to accept them as legal tender from the Continental Army because they were worthless pieces of paper. So the army took what they needed from the people. And gave them IOUs that Congress would settle at some later date.

The Germans paid for World War I by borrowing money. The increased debt of the nation during the war devalued the currency. The German mark. It took more and more of them to exchange for stronger currencies. Like the U.S. dollar. The Versailles Treaty that ended the war saddled Germany with the responsibility for the war. And made them pay enormous amounts of war reparations. In gold. Or foreign currency. So the Germans turned up the printing presses. And printed marks like there was no tomorrow. Making them less scarce. And worth less. It took more and more of them to exchange for foreign currency to make their reparation payments. But they didn’t care what the exchange rate was. For whatever amount of devalued marks they needed to exchange they just turned to their printing presses. And printed whatever they needed. This rapid inflation devalued the mark more. Requiring them to print more. Which just fed into the inflation. Eventually bringing on a hyperinflation where it took enormous amounts of marks to buy anything. For example, it was cheaper and easier to burn marks than it was to buy firewood to burn.

Anytime you make money less scarce you make it worth less. The inflation of the money supply devalues the currency. Which raises prices. Because it takes more of the devalued currency to buy what it once did before the inflation. So expanding the money supply leads to price inflation. Good if you’re a rich investor. But if you’re someone just trying to buy firewood to keep from freezing to death during the winter? Not so good. The Romans, the Europeans, the Americans and the Germans all suffered from bad inflation. Some worse than others. If the inflation is so bad, such as in the case of hyperinflation, people may lose all confidence in the currency. And simply stop using it. Going to a barter system instead. Like when a tomato-grower trades his tomatoes for a cheese-maker’s mozzarella cheese.